A Global Economics Model

NOT FOR QUOTATION WITHOUT PERMISSION OF THE AUTHOR

A GLOBAL ECONOMIC MODEL

L.R. K l e i n

-

D a t a P r e p a r a t i o n by B i j o u Yeh, Programming by

Hans-Holger Rogner J u n e 1979

WP-79-76

W o r k i n g P a p e r s a r e i n t e r i m r e p o r t s o n work o f t h e I n t e r n a t i o n a l I n s t i t u t e f o r A p p l i e d S y s t e m s A n a l y s i s a n d h a v e r e c e i v e d o n l y l i m i t e d r e v i e w . V i e w s o r o p i n i o n s e x p r e s s e d h e r e i n d o n o t n e c e s s a r i l y r e p r e - s e n t t h o s e o f t h e I n s t i t u t e o r o f i t s N a t i o n a l Member O r g a n i z a t i o n s .

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS A-2361 L a x e n b u r g , A u s t r i a

PREFACE

There are appropriate occasions for large detailed models and for small simple models. In the context of the analysis of the world economy over long stretches of time, a good case can be made for the building of a small model--one that captures the

essence of some aspect of growth and general economic environ- ment that can serve a wide variety of problems. Many of these problems are going to be handled by scholars who are not econo- mists--therefore, it is advantageous to construct a model that is not data-intensive, that is easy to manage, and easy to apply to a limited range of issues.

It is in response to the need for a model that meets such constraints that I have put together the simple system in this paper. There.is much to be said in favor of learning to walk before learning to run. It is in this spirit that the present

system is tentatively put forward.

The present study is only a first attempt. Many of the data and specifications need further work in a number of direc- tions. It is hoped that it will generate discussion and provide a framework for moving to larger scale global systems that cap- ture more of the detailed inter-relationships of the world

economy. It is also hoped that the discussion can lead to suggestions for better data compilation and processing.

I wish to thank Bert Hickman of Stanford University for

research collaboration on earlier versions of the present system, Mrs. Bijou Yeh for the enormous task of putting that data series together (this part was data intensive--the use and maintenance of the data are much less intensive) and Hans-Holger Rogner for programming assistance.

A GLOBAL ECONOMIC IIODEL

B y L. R . K l e i n

-

D a t a P r e p a r a t i o n by B i j o u Y c h Prograiruning by IIans-Holgcr Roaner N o t i v a t i o n and O b j e c t i v e s

T h e p r e d o m i n a n t e m p h a s i s i n macro e c o n o m e t r i c model b u i l d i ~ ~ g h a s heel1 on s h o r t t e r m n a t i o n a l m o d e l s , c o n c e r n e d w i t h f o r e c z s t i n g o v e r a n h o r i z o n o f some o n e t o t h r e e y e a r s ( b y m o n t h s , q u a r t e r s , y e a r s ) . Some o f t h e s e m o d e l s , e s p e c i a l l y t h o s e w i t h l a r g e i n p u t -

o u t p u t c o m p o n e n t . s , h a v e b e e n r e g u l a r l y u s e d i n d e c a d e - l o n g s i m u l a t i o n s . Nore r e c e n t l y , e c o n o m e t r i c i a n s h a v e become c o n c e r n e d w i t h l o n g e r

term p r o s p e c t s , n o t a b l y b e c a u s e e n e r g y s c e n a r i o s r e q u i r e a t l e a s t

two o r t h r e e d e c a d e s t o d e a l w i t h s i g n i f i c a n t c h a n g e s i n t h e d e l i l T e r y a n d u s e o f e n e r g y .

The f e w l o n g t e r m m o d e l s t h a t h a v e b e e n u s e d f o r e n e r g y a n a l y s i s o r r e l a t e d p r o b l e m s o f r e s o u r c e e x h a u s t i o n a n d e n v i r o n m e n t a l p r o - t e c t i o n h a v e b e c n r e l a t i v e l y l a r g e s y s t e m s . T h i s i s p a r t i c u l a r l y t r u e o f i n p u t - o u t p u t b a s e d s y s t e m s . Models d e s i g n e d by J o l - g e n s o n a n d a s s o c i a t e s n i g h t b e s o compact t h a t t h e y h a v e n o more t h a n L O O o r s o e q u a t i o n s , w h i l e t h e m o d e l s o f Almon (IMFORUX), Wharton EPA ( W E F A ) , a n d t h e Economic C o u n c i l o f Canada ( C A N U I D E ) c o n s i s t o f some o n e t h o u s a n d o r more e q u a t i o n s . T h e s e a r e l a r g e d a t a -

i n t e n s i v e s y s t . e m s . They a r e e x c e l l e n t b u t n o t r e a d i l y m2r!agcable.

A l s o , s u c h m o d e l s h a v e b e e n m a i n - l y c o n f i n e d t o a n a l . y s i s o f n a t i o n a l e c o n o m i c s . The L e o n t i e f model a n d some new p r o p o s a l s a r e t r y i n g t o d e a l w i t h t h e w o r l d economy a t a d e t a i l e d i n t e r - i n d u s t r y l e v e l , b u t model management p r o b l e m s a n d d a t a p r o b l e m s a r e s e v e r e . The p r o j e c t LINK m o d e l s t r e a t t h e e n t i r e w o r l d t r a d i n g s y s t e m a t t h e i n d i v i d u a l c o u n t r y l e v e l w i t h new r e s e a r c h i n t o c a p i t a l f l o w s / e x c h a n g e r a t e s ,

but that is a 5000-equation syst.em (still expanding) and very corn- plicatcd to manaqe, apart from l ~ i n q confined to a fai.rly short horjzon - no more than a decade, at the present time.

After reviewing available systems and looking at perceived research needs, a system meeting the foll.owing conditions has been devised:

1. It should be global in scope

-

covering the whole world;

2. It should be global in concept - covering broad macro economic behavior or conditions; '

3. It should be capable of interpreting some of the world's main problems of international economic relations;

4. It should be easily manageable and not data intensive;

5.

It should be a general framework that readily admits improvement and elaboration;

6. It should be suitable for analysis of long term horizons.

During the early research phases of the Mesarovic-Pestel global modeling exercise, a general specification of an economic module meeting most of the above conditions was prepared jointly by B.G. Iiickman and L.R. ~1ein.l The authors were not prepared to release the paper at that time bedause the model lacked price

relationships, as well as an adequate data base. It is the intent

of the present paper to carry through this work. partially to completion.

'.M.

Mesarovic and E. Pestel, Nankind at the Turning Point, (N.Y. :

E.P. Dutton (Reader's Digest Press, 1974), p.198. A complete specification was presented to the IIASA Conference on ~ l o b a l Modeling, March, 1974, Baden. The equations were published in Russian, A.A. Rivkin, I. Sh. Amirov, "Critical Analysis of Global Proj,ect 'Humanity in Front of Choice' Models," Economj.cs and

Matheniati.ca1 -- - ^. ~ethods', --- XI11 (May-June, 1977), 440-56.

Thanks are due to Dr. llickman for critical observiations on the present paper.

The d a t a p r o b l e m i s n o t s i m p l e , b u t o n c e a u s a b l e d a t a b a s e h a s b e e n c o n s t r u c t e d , i t i s r e l a t i v e l y e a s y t o m a i n t a i n i t . The p r o b l e m i s t o make a n a d e q u a t e i n v e n t o r y and a n a l y s i s o f d a t a c o u n t r y - b y - c o u n t r y a n d t o combine them i n t o m e a n i n g f u l a g g r e g a t e s f o r d e s i g n a t e d g r o u p i n g s o f n a t i o n s . T h e r e w i l l a l w a y s b e k n o t t y , u n s o l v e d d a t a p r o b l e m s i n t h i s work, b u t o n c e a s e t o f p r o c e d u r e s h a s b e e n worked o u t , i t s h o u l d b e p o s s i b l e t o u p d a t e a n d r e f i n e t h e b a s i c d a t a set w i t h r e l a t i v e e a s e . I t i s i n t h i s s e n s e t h a t . t h e model i s n o t d a t a - i n t e n s i v e .

The m o t i v a t i o n , t h e r e f o r e , i s t o c o m p l e t e t h e e c o n o m i c model s t r u c t u r e t h a t w a s o r i g i n a l l y i m p l e m e n t e d f o r t h e M e s a r o v i c - P e s t e l g l o b a l model by a d d i n g a p r i c e s y s t e m , b u i l d i n g a u s a b l e d a t a b a s e , a n d u s i n g t h e s y s t e m i n l o n g r u n s i m u l a t i o n s . A l t h o u g h t h e s y s t e r n i s c o n t e m p l a t e d f o r b a c k g r o u n d e c o n o m i c u s e i n e n e r g y a n a l y s i s , it i s n o t a s y s t e m w i t h e x p l i c i t e n e r g y s e c t o r s . I t c a n , h o w e v e r , s e r v e a s a b a s e i n t o w h i c h t o imbed o r o n t o w h i c h t o a d d a n e n e r g y s e c t o r . O t h e r s e c t o r s f o r w h i c h l o n g r u n a n a l y s i s i s p e r t i n e n t , s u c h a s a g r i c u l t u r e , demography, o r e x h a u s t i b l e r e s o u r c e s , c o u l d a l s o b e s t u d i e d i n t h e same framework. The s y s t e m i s n o t e n e r g y s p e c i f i c , a l t h o u g h t h e l o n g r u n n a t u r e of t h e economic a s p e c t s o f e n e r g y m o t i v a t e t h e p r e p a r a t i o n o f t h i s model.

Model S p e c i f i c a t i o n

The p r e s e n t v e r s i o n o f t h e model i s n o t i d e n t i c a l w i t h t h a t o r i g i n a l l y c o n s t r u c t e d f o r t h e M e s a r o v i c - P e s t e l s y s t e m , b u t i t i s d e s i g n e d i n t h e same s p i r i t . I t i s d i f f e r e n t p a r t l y b e c a u s e o f

- 4 -

some dal:a/accounting issues, and it has been enhanced by the inclusion of a price system.

The

global economy can be split into regions in various ways.

From the viewpoint of economic structure, a useful set of groupings is:

The first world, consisting of the OECD countries plus South Africa. These might also be called the industrial democracies and will be denoted by subscript "D",standing for

--

developed.

-

The second world, consisting of the centrally planned (CMEA) economies in Eastern Europe, the Soviet Union, Mainland China, VietNam, North Korea, Mongolian Peoples Republic, and Cuba.

They will. be denoted by subscript "C", standing for centrally planned.

The third world, consisting of the developing countries in

Africa, Asia, Latin America, and the Middle East. South Africa

is

excluded from Africa; China and other centrally planned

economies from Asia; and Cuba from Latin America. Island nations of the Far East are included in Asia. The developing countries will be denoted by subscript "L"

,

standing for -- less develo~ed countries.

Occasionally, the third world is split into two groups -oil producers in OPEC and those outside OPEC. The latter are sometimes referred to as the "fourth" world. It would be possible to make an OPEC/non-OPEC split and have four economic regions, but the present

p a p e r i s b a s e d o n t h r e e . F o r e n e r g y a n a l y s i s , i t i s d e f i n i t e l y g o i n g t o b e u s e f u l t o s u b d i v i d ; t h e w o r l d i n t o f o u r . g r o u p s . M e x i c o , a s w e l l a s some d e v e l o p e d c o u n t r i e s a r e m a j o r o i l p r o d u c e r s ;

t h e r e f o r e , OPEC n a t i o n s d o n o t a u t o m a t i c a l l y e n c o m p a s s t h e g l o b a l o i l s u p p l y . From a p r a c t i c a l p o i n t o f v i e w , h o w e v e r , i t i s p r o b a b l y s i m p l e s t t o d e a l w i t h OPEC a s a n e c o n o m i c e n t i t y . M i d d l e E a s t ,

P e r s i a n G u l f o r o t h e r g r o u p i n g s o f o i l p r o d u c e r s w o u l d a l s o b e o f some u s e i n t h e a n a l y s i s , b u t c o n s i d e r i n g a l l a s p e c t s o f t h e d a t a a n d s t r u c t u r a l b e h a v i o r a l p r o b l e m s , it seems b e s t t o t r e a t OPEC s e p a r a t e l y i f a move f r o m t h r e e t o f o u r g r o u p i n g s i s t o b e u n d e r - t a k e n .

The model i s q u i t e c o m p a c t a n d c a n b e l a i d o u t a l l a t o n c e . D , I n d u s t r i a l Democracies

s Y = k(Y-Y-1) s = 0 . 2

+

E/Y k = K/Y

K = Lexp I 0 . 6 2 7 3 8 I n (w/P)

(-1 +

2.869751

C, Centrally --- Planned Economies SY = k (Y-Y- ,)

s = 0.097927

+

^0.263063

(YIN) - 1

k = 40.0 (XDC/y)

+

^3.08

K = kY

L, Less Developed Countries s Y = k ( Y - Y

-

¹ )

k = K/Y

t

i

K = Lexp (0.329619 In (W/p)

+

^1.149630)

+

E,24(0=95) (TDL)

+

^TDI,

Ern

V a r i a b l e s of t h e Global Model Y = r e a l G D P i n each a r e a ( Y D f Y L f Y C )

s = s a v i n g s r a t e ( s D f s L f sC)

k = c a p i t a l - o u t p u t . r a t i o ( k D f kLf KC) E = r e a l t r a d e b a l a n c e ( E D , EL)

1 / ~ = terms of t r a d e ( T ~ , T ~ )

K = s t o c k of c a p i t a l ( K . D~ KLf K C )

w/p = r e a l wage r a t e ( (w/pIDt ( w / P ) ~ . ( W / P ) ~ ) i / p = r e a l i n t e r e s t r a t e ( ( i / ~ ) ~ , ( i / ~ ) ~ ) L = employment (L~,, L ~ , LC)

N = p o p u l a t i o n ( N D f N L f N C )

T~~

-

r e a l t r a n s f e r s from developed t o developing a r e a s

CRDC = t r a d e c r e d i t s g r a n t e d by developed t o c e n t r a l l y planned economies X i j = r e a l e x p o r t s from a r e a i t o a r e a j ( i , j = D f L , C )

Xi = t o t a l r e a l e x p o r t s of a r e a i ( i = D f L , C ) World Trade Matrix

Importing

Exporting D L C T o t a l E x p o r t s

Row sums a r e t o t a l e x p o r t s ; column sums a r e t o t a l i m p o r t s ( n o t used e x p l i c i t l y i n t h i s model)

W i t h i d e n t i . t i e s and a l l , t h e r e a r e o n l y 35 e q u a t i o n s i n t h i s world model. With d i r e c t s u b s t i t u t i o r l o f some i d e n t i t i e s , i t c o u l d be made somewhat s m a l l e r , b u t t h i s i s a s u f f i c i e n t l y compact d e s c r i p t i o n o f t h e world economy t h a t i t c a n b e programmed and m a n i p u l a t e d w i t h a g r e a t d e a l o f e a s e . I t r e m a i n s t o e x p l a i n

i t s l o g i c a l s t r u c t u r e i n t e r m s o f b r i n g i n g o u t t h e main c h a r a c t e r i s t i c s o f e a c h w o r l d , o f e x p l a i n i n g t h e i n t e r n a t i o n a l t r a d e / t r a n s f e r

r e l a t i o n s h i p s , and i n g e n e r a t i n g t h e w o r l d g r o w t h p r o c e s s . Each

world i s s t r u c t u r e d s o a s t o show some o f i t s p e c u l i a r c h a r a c t e r i s t i c s and t h e way p r e s e n t o r c o n t e m p l a t e d w o r l d c o n d i t i o n s would a f f e c t

them.

T h e r e a r e t h r e e s t r u c t u r a l components i n e a c h o f t h e s e t h r e e models:

( i ) s a v i n g and i n v e s t m e n t b e h a v i o r , ( i i ) r e l a t i v e p r i c e f o r m a t i o n ,

( i i i ) i n t e r n a t i o n a l t r a d e .

To e x p l a i n t h e u n d e r l y i n g a s s u m p t i o n s i n t h e model, i t is con- v e n i e n t t o d e a l w i t h t h e s e components, i n t u r n . F i r s t , however, i t w i l l be i n s t r u c t i v e t o l i s t t h e dependent. ( e n d o g e n o u s ) and i n d e p e n d e n t

(exogenous) v a r i a b l e s o f t h e s y s t e m . The d e p e n d e n t v a r i a b l e s a r e :

w i

F i r s t World

-

_{s , Y, ED k D K D}

(PI,

( - P ) ~ L D

Second World

-

^{s Y} k K (-1 W LC

C C C C P C

They a r e s i m i l a r f o r e a c h o f t h e t h r e e c a s e s . T h e r e i s n o

i n t e r e s t r a t e o r n o n - z e r o t r a d e b a l a n c e v a r i a b l e f o r t h e c e n t r a l l y p l a n n e d e c o n o m i e s . The c a p i t a l t r a n s f e r v a r i a b l e a p p e a r s o n l y i n t h e e q u a t i o n s y s t e m f o r t h e d e v e l o p i n g c o u n t r i e s .

The i n d e p e n d e n t v a r i a b l e s a r e T W N N

.

^The t e r m s D T~ C R ~D ~C L

o f t r a d e a n d t r a d e c r e d i t v a r i a b l e s a r e assumed t o b e e x o g e n o u s . To t h e e x t e n t t h a t t h e t e r m s o f t r a d e b e t w e e n r e g i o n s a r e now c o n t r o l l e d by t h e O P E C c a r t e l , t h e a s s u m p t i o n t h a t ^T~ o r T i s

L

e x o g e n o u s h a s a g r e a t d e a l o f p l a u s i b i l i t y . The a r g u m e n t s a g a i n s t t h i s a s s u m p t i o n a r e t h a t a l l t r a d e w i t h t h e d e v e l o p i n g w o r l d i s n o t o i l t r a d e a n d t h a t t h e t e r m s o f t r a d e , l i k e e x c h a n g e r a t e s , s h o u l d u l t i m a t e l y b e e x p l a i n e d by s u p p l y a n d demand b a l a n c e . Even OPEC may n o t b e a b l e t o d e f y t h e l a w s o f e c o n o m i c s i n d e f i n i t e l y . They h a v e

s u c c e e d e d i n e n f o r c i n g t h e i r p r i c e f o r 5 y e a r s a n d may c o n t i n u e t o do s o , b u t a l o n g r u n model m i g h t w e l l a s s u m e t h a t t h e l a w s o f e c o n o m i c s e v e n t u a l l y p r e v a i l . T h i s n o t i o ? w i l l b e i n t r o d u c e d i n l a t e r v e r s i o n s . A t t h e p r e s e n t t i m e , e x o g e n e i t y o f r D a n d r L a r e assumed.

T r a d e c r e d i t s g r a n t e d by i n d u s t r i a l t o c e n t r a l ] - y p l a n n e d e c o n o m i e s a r e a l w a y s u n d e r d i s c u s s i o n , i n sorrle f o r m o r o t h e r , a n d i n v o l v e a number o f noneconomic c o n s i d e r a t i o n s . F o r t h e p r e s e n t a n a l y s i s , h o w e v e r , t h i s v a r i a b l e i s k e p t i n t h e e x o g e n o u s c a t e g o r y , s u b j e c t t o p o l i t i c a l d e t e r m i n a t i o n .

The o v e r a l l g r o w t h p r o c e s s i s d e m o n s t r a t e d i n e a c h c a s e b y t h e same mechanism, a Harrod-Domar o r m u l t i p l i e r - a c c e l e r a t o r

mechanism that combines the productivity of capital with the pro-

vision of savings for investment purposes. It can be seen. immediately that each world area is headed by the equation

The flow of savings is

where Y

=

real output

s

=

savings rate (average propensity to save) S

=

total real savings.

Total capital is related to output by

k

₌

capital-output ratio (inverse of average productivity o h a p i t a l )

K

=

stock of capital Investment is given by

and the accounting equality between savings and investment gives us the dynamic relation to determine output

y = -

k - - - ¹ k-s ' - 1

The ratio s/k is crucial in interpreting the long run growth rate. The savings rate will generally be bounded

empirically in the narrower range from 0.1 to 0.4. The capital

output ratio will he generally a multiple of

GDP,

Define the growth rate as that value of r satisfying

This is all simple enough if s and k are constants. Then, only one equation would be needed for output determination in each world area. The fact is that s and k are not constant. They are ratios of variables that must be separately determined by distinctive processes in each area and affected by international economic relations.

0 /"

The simple ~arrod-D$mar model with constant savings and

accelerator coefficientsare only indicative in the present context.

We assume that a finite difference equation in Y that resembles the basic multiplier-accelerator equation holds, with variable coefficients This does not strictly equate savings and investment for three

reasons:

1. savings are reckoned "gross" in this model, while

investment would need to have depreciation added to the

change in capital stock. We would have to write

where the second term on the right denotes capital

I

consumption.

2.

With

a

variable capital-output ratio,net investment investment would be

A

K =

kAY + ^YAk

We have not used the second term on the right hand side.

¹ 3.

Our accounting is not completedin this model because

only merchandise trade is explicitly accounted for.

We did not model trade in invisibles that would be

A /

needed for the savings-investment identity. See p , below. In a later, extended version of this model, some of these different treatments of the savings - investment identity are being measured and modeled differently.

The historical statistics indicate remarkable stability in the savings ratio, s, for the industrial democracies at about

0.2.

Constancy of the savings ratio has long been'observed in individual developed countries, but has not been studied widely for the first world as

a

whole. There are well known cyclical fluctuations in the savings rate, and it is not strictly a constant. Something new has come on the horizon, however, in connection with new pricing of energy, namely a transfer of resources from the developed to 1. We did not use the incremental (XCOR) ratio v

=

AK/AY because

it tends to be unstable in annual statistical series.

-

^{1 3}

-

t h e d e v e l o p i n g c o u n t r i e s , i n c l u d i n g OPEC i n t h e l a t t e r . Nominal t r a d e h a s g e n e r a l l y b e e n i n o v e r a l l b a l a n c e ' f o r t h e d e v e l o p e d c o u n t r i e s i n t h e f i r s t w o r l d ,

(PX)D XD ^-, (PMlD (XDD + XLD + XCD) ^{= 0} I f w e d i v i d e b o t h s i d e s by PXD, w e g e t

A f t e r t h e r e - p r i c i n g o f o i l by OPEC, i n 1 9 7 4 , t h i s m a g n i t u d e t u r n e d s t r o n g l y u n f a v o r a b l e f o r t h e d e v e l o p e d c o u n t r i e s . he r e c i p r o c a l o f t h e terms o f t r a d e w i l l b e d e n o t e d by T ~ a n d t h e ,

q u a n t i t y

w i l l Le s t r o n g l y n e g a t i v e a s l o n g a s -rD i s s i g n i f i c a n t l y g r e a t e r t h a n u n i t y . I t i s i n d . i c a t i v e o f t h e r e a l l o s s o f r e s o u r c e s t h r o u g h u n f a v o r a b l e t e r m s

of

t r a d e . I t m e a s u r e s e x p o r t s l e s s c o s t o f i m p o r t s , r e c k o n e d i n e x p o r t p r i c i n g u n i t s .

. ^.

The behavio3:al a s s u m p t i o n i s made t h a t s a v i n g s i n t h e f i r s t w o r l d w i l l d e p e n d o n the s i z e o f E ; W i t h r e l a t i v e l y h i g h e n e r g y

p r i c e s , E - w i l l g e n e r a l l y b e n e g a t i v e , a n d s a v i n g s w i l l f a l l .

E x p r e s s i n g E a s a f r a c t i o n o f o u t p u t , w e assume t h a t t h e p r e v i o u s l o n g t e r m s t a b l e r a t e o f 0 . 2 w i l l b e b r o u g h t down by t h e u n f a v o r a b l e terms o f t r a d e . T h a t i s why w e w r i t e

T h e r e a r e n o t enough d a t a t o d e t e r m i n e t h i s r e l a t i o n t h r o u g h a s t a t i s t i c a l l y e s t i m a t e d r e g r e s s i o n ; t h e r e f o r e , a s i m p l e a d d i t i v e r e l a t i o n h a s been a s s n n ~ e d a s a f i r s t a p p r o x j . m a t i o n . A s t h e t e r m s

o f t r a d e b e c o n ~ e more u n f a v o r a b l e , c e t . p a r . , s y i l l f a l l , a n d t h c

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r e s u l t i n g g r o w t h r a t e o f o u t p u t w i l l a l s o f a l l ; b o t h n u m e r a t o r a n d d c n o m i r l a t o r o f

w i l l t e n d t o f a l l , i f k i s u n c h a n g e d .

The c a p i t a l . - o u t p u t r a t i o , h o w e v e r , i s n o t a c o n s t a n t a n d c a n n o t b e a s s u m e d g e n e r a l l y , t o b e u n c h a n g e d . I f t h i s r a t i o a n d t h e l a b o r p r o d u c t i v i t y r a t i o a r e n o t a s s u m e d t o b e c o n s t a n t , t h e n t h e r e i s i m p l i c i t s u b s t i t u t i o n p o s s i b l e b e t w e e n l a b o r a n d c a p i t a l . The p r o d u c t i o n f u n c t i o n s a r e n o t e x p l i c i t l y i n t r o d u c e d i n t o t h e m o d e l s , b u t r e l a . t i o n s d e r i v e d f r o m them are. I n t h e m o d e l s t h e r e

i s s e p a r a t e d e t e r m i n a t i o n o f K a n d Y ; t h e c a p i t a l - o u t p u t r a t i o i s s i m p l y t h e r a t i o o f t h e s e two e n d o g e n o u s v a r i a b l e s . S i m i l a r l y , employment a n d o u t p u t a r e s e p a r a t e l y d e t e r m i n e d a n d t h e l a b o r

p r o d u c t i v i t y r a t i o i s s i m p l y t h e r a t i o o f t h e s e two e n d o g e n o u s

v a r i a b l e s . B o t h r a t i o s move f r o m o n e t i m e p e r i o d t o t h e n e x t ; t h i s i s t h e e s s e n c e o f t h e a s s u m p t i o n t h a t p r o d u c t i o n t a k e s p l a c e w i t h t h e p o s s i b i l i t y of s u b s t i t u t i o n . I n t h e D a n d L m o d e l s , i t i s assumed t h a t f a c t o r s of p r o d u c t i o n a r e u s e d e f f i c i e n t l y . C o s t m i n i m i z a t i o n would r e q u i r e t h a t .

i n o t h e r w o r d s t h a t t h e r a t i o s o f m a r g i n a l p r o d u c t i v i t i e s e q u a l t h e r a t i o s o f u n i t f a c t o r r e w a r d s . F o r a g e n e r a l c l a s s o f p r o - d u c t i o n f u n c t i o n s

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w h e r e a i s t h e e l a s t i c i t y o f s u b s t i t u t i o n b e t w e e n c a p i t a l a n d l a b o r . T h e c s t i n i ~ t c d \.el-sion o f t h i s equat.i.on w i t h

e s t a = 0 . 6 2 7 3 8 i s n o r m a l i z e d o n K , a s

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K = L e x p ( o o + o l n W

i n t h e D a r e a model. The L a r e a c a s e w i l l b e d i s c u s s e d l a t e r . K c a n n o t b e d e t e r m i n e d u n l e s s L i s d e t e r m i n e d , a n d t h e wage r a t e must b e d e t e r m i n e d i n o r d e r t o d e t e r m i n e L . T h i s i s t h e b a s i c i d e a o f s i m u l t a n e i t y o r i n t e r d e p e n d e n c e i n t h e D s y s t e m .

It i s assumed t h a t t h e r e a l wage f o l l o w s l a b o r p r o d u c t i v i t y i n t h e

l o n g r u n a n d t h a t t h e p a r t i c i p a t i o n r a t e , L / N , i s a n i n c r e a s i n g f u n c t i o n o f t h e r e a l wage r a t e . T h e s e a r e s t r a i g h t f o r w a r d t r e n d i d e a s , b u t no b a s i c d i s t i n c t i o n i s made b e t w e e n l a b o r f o r c e a n d employment;

i . c . , t h e c y c l i c a l phei~omenon o f unernpl-oyment. i s i q n o r e d . I t i s ' - n o t t h a t f u l l employment i s assumed. I t i s s i m p l y t h a t t h e a v e r - a g e l o n g r u n r a t e o f unemployment i s a c c e p t e d a s a norm f o r t h i s s y s t e m . Unemployment w i l l f l u c t u a t e a g r e a t d e a l i n t h e s h o r t r u n , b u t c y c l i c a l d y r a m i c s a r e b e i n g l e f t o u t o f t h i s t r e n d s y s t e m .

The n e x t e q u a t i o n f i x e s t h e d e f l a t e d i n t e r e s t r a t e a t a c o n - s t a n t v a l u e , 0 . 0 6 i n t h e p r e s e n t c a s e . An a c c e p t e d c o n c e p t o f t h e r e a l r a t e o f i n t e r e s t i s

A P i

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Even i f w e s i m p l i f y by making t h e e x p e c t e d r a t e o f i n f l a t i o n t h e same a s t h e r a t e o b s e r v e d i n t h e l o n g r u n , w e would s e r i o u s l y com- p l i c a t e t h e s y s t e m by t r y i n g t o e x p l a i n b o t h i and - A a s s e p a r a t e

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v a r i a b l e s . I n a l o n g r u n a n a l y s i s , w h e r e i n t e r e s t f o c u s e s on t h e

n e x t c e n t u r y , i t i s . n o t m e a n i n g f u l t o t r y , t o o u t g u e s s t h e m o n e t a r y a u t h o r i t i e s a n d s e t u p a framework f o r j o i n t l y e s t i m a t i n g i a n d

.

The i n f l a t i o n r a t e i s u s e d t o c o r r e c t n o m i n a l v a l u e s o f i i n

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o r d e r t o g e t a t r e a l v a l u e s . An a l t e r n a t i v e c o r r e c t i o n i s t o d i v i d e i by p , w h e r e p i s a n i n d e x on a f i x e d b a s e . T h i s i s

f o r m a l l y d i f f e r e n t f r o m s u b t r a c t i n g t h e i n f l a t i o n r a t e , b u t a c h i e v e s a s i m i l a r c o r r e c t i o n o f movement i n i . An i n t e r e s t i n g c o n c e p t i n t h e e c o n o m i c s l i t e r a t u r e , known a s t h e G i b s o n P a r a d o x o r t h e G i b s o n E f f e c t p r o v i d e s a n e m p i r i c a l j u s t i f i c a t i o n f o r u s i n g - i a s t h e r e a l

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r a t e . 1 A . H . G i b s o n n o t e d t h a t t h e r e i s a s t r o n g c o r r e l a t i o n b e t w e e n t h e norninal i n t e r e s t r a t e a n d a n i n d e x o f t h e p r i c e l e v e l . T h i s

c o r r e l a t i o n h a s b e e n o b s e r v e d o v e r l o n g p e r i o d s o f t i m e a n d i n d i f f e r e n t i n d u s t r i a l c o u n t r i e s . I t a l s o s t a n d s up w e l l i n up-

d a t i n g t o t h e p r e s e n t e r a , l o o k i n g b a c k a s f a r a s t h e t u r n o f t h i s c e n t u r y . The d a t a t h a t w e s h a l l d e s c r i b e i n a l a t e r s e c t i o n i n d i c a t e t h a t n o t o n l y i s i a l i n e a r f u n c t i o n o f p , f o r t h e f i r s t w o r l d a s a w h o l e , b u t i t i s p r a c t i c a l l y p r o p o r t i o n a l . T h a t e n a b l e s u s t o

w r i t e - i a s a c o n s t a n t , a n d g r e a t l y s i m p l i f i e s t h e p r e s e n t a t i o n . T h i s P

i s why w e h a v e

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i n t h e D a r e a m o d e l .

The e q u a t i o n s f o r t h e D a r e a a r e r o u n d e d o u t by w r i t i n g i m p o r t r e q u i r e m e n t f u n c t i o n s a s p r o p o r t i o n s o f GDF. T h e r e i s o n e p r o - p o r t i o n f o r e a c h a r e a f r o m w h i c h i m p o r t s a r e d r a w n , i n c l u d i n g t h e

D a r e a i t s e l f . With a d e f i n i t i o n o f XD i n terms o f b i l a t e r a l e x p o r t s ,

1. See J . M. I:eyncs, A

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T r e a t i s e on - .. Money ^{.- - . .-} (London: Macn~il.l.an, 1 9 3 0 ) . Kc).!lc?: rcm;li-h.d tl?: t. Gi hso:;

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s f ^j nc1 i.n?

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^{i s} o n e o f t h e m o s t com-

p l c t c l l y c s t a l ~ . l : i . s h ~ d c l n 1 1 i r i c ; l l fact...; ~ i t h i n t h e w h o l e f i e l d o f q u a n t i t a t i v e cconorriics

. . .

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w e c o m p l e t e t h e e q u a t i o n s f o r t h e f i r s t w o r l d , D .

Wc n e x t t u r n t o a n e x p l a n a t i o n o f t h e e q u a t i o n s f o r t h e t h i r d w o r l d , L. The b a s i c income g e n e r a t i n g e q u a t i o n f o r g r o w t h d e t e r m i n a t i o n i s t h e same a s i n t h e D c a s e , b u t t h e e q u a t i o n s e x p l a i n i n g s a n d k (K) a r e d i f f e r e n t . I n t h e t h i r d w o r l d , E i s now p o s i t i v e b e c a u s e t h e t e r m s o f t r a d e , T ~ h a v e moved s t r o n g l y ,

i n t h e i r f a v o r , m a i n l y b e c a u s e o f h i g h p e t r o l e m . p r i c e s b u t p a r t l y b e c a u s e o f r e l a t i v e l y h i g h p r i c e s f o r o t h e r b a s i c m a t e r i a l s . The e f f e c t o f E - Y on s h a s b e e n v e r y t e n t a t i v e l y e s t i m a t e d b e c a u s e f e w o b s e r v a t i o n s a t t h e new f a v o r a b l e v a l u e s o f T~ a r e a v a i l a b l e . The h i s t o r i c a l p a t t e r n o f s i s q u i t e d i f f e r e n t from t h a t i n t h e p r e v i o u s c a s e . I t h a s n o t a t a l l b e e n s t e a d y b u t h a s g r a d u a l l y r i s e n a s g r o w t h i n t h e d e v e l o p i n g w o r l d h a s t a k e n p l a c e ; t h e r e f o r e , p e r c a p i t a g r o w t h i n r e a l G D P i s a n o t h e r v a r i a b l e i n f l u e n c i n g t h e s a v i n g s r a t e . Fc.: a g r e a t p a r t o f t h e p e r i o d s i n c e 1 9 6 0 , s h a s b e e n l o w f o r t h e d e v e l o p i n g c o u n t r i e s a n d h a s r e a c h e d a b o u t 0 . 2 0 o n l y i n r e c e n t y e a r s .

The c a p i t a l - o u t p u t r a t i o i s much l o w e r i n t h e L r e g i o n t h a n i n t h e D r e g i o n t b u t a l s o t h e e l a s t i c i t y o f s u b s t i t u t i o n b e t w e e n l a b o r and c a p i t a l i s much s m a l l e r ; i t i s o n l y o n e - h a l f a s l a r g e . To a l a r g e e x t e n t , c a p i t a l i s t h e l i m i t i n g f a c t o r , and t h e a b u n d a n t l a b o r f o r c e i s drawn upon t o work w i t h t h e s c a r c e c a p i t a l f a c t o r t o t h e e x t e n t t o which t h e l a t t e r i s a v a i l a b l e . C a p i t a l i m p o r t s f o r t h e d e v e l o p i n g w o r l d come n o t o n l y f r o m t h e w o r k i n g o f t h e m a r k e t p r o c e s s b u t a l s o t h r o u g h g r a n t s a n d l o a n s made by t h e o t h e r s e c t o r s , m a i n l y t h e d e v e l o p e d s e c t o r . T r a d e b e t w e e n t h e d e v e l o p e d a n d d e v e l o p i n g s e c t o r s i s assumed t o b e u n b a l a n c e d t o t h e e x t e n t t o which r e a l r e s o u r c e s a r e t r a n s f e r r e d from t h e f o r m e r t o t h e l a t t e r . T h e s e r e a l

r e s o u r c e s a r e t h e n added t o K t o augment t h e p r o c e s s o f c a p i t a l e x p a n s i o n . These r e a l r e s o u r c e s a r e d e p r e c i a t e d a t t h e s t a n d a r d r a t e o f 5% p e r annum assumed f o r a l l c a p i t a l i n t h e L a r e a .

I t i s i n t e r e s t i n g t o n o t e t h a t i n c u r r e n t p r i c e s XDL f a l l s f a r s h o r t o f XLD. T h i s i s l a r g e l y t h e p e t r o l d e f i c i t . I n r e a l t e r m s , however, i . e . i n 1970 p r i c e s , a t 1970 exchange r a t e s ,

'DL i s g r e a t e r t h a n XLD. T h i s i s t h e r e s o u r c e t r a n s f e r t h a t . s h o w s how much i n r e a l t e r m s t h e d e v e l o p i n g c o u n t r i e s c a n buy f r o m t h e

d e v e l o p e d c o u n t r i e s w i t h t h e i r s u r p l u s . The v a r i a b l e TDL i s , t h e r e f o r e , a s i g n i f i c a n t p o l i c y v a r i a b l e t h a t d r i v e s t h e s y s t e m , showing how

much e x t r a i n p u t i n t o c a p i t a l e x p a n s i o n t h e d e v e l o p i n g c o u n t r i e s c a n o b t a i n .

TDL d o e s n o t c o n s i s t e n t i r e l y o f p u r c h a s e s from t h e p e t r o l f u n d . I t a l s o r e p r e s e n t s a i d t h a t d e v e l o p e d c o u n t r i e s have t r a d i t i o n a l l y made. A g o a l h a s a l w a y s been t o h a v e t h i s a i d a t o n e o r two p e r c e n t of t h e GDP o f d e v e l o p e d c o u n t r i e s . A c t u a l a i d h a s f a l l e n s h o r t of

t h a t g o a l by s i g n i f i c a n t amounts, b u t a p o l i c y p a r a m e t e r a i s i n t r o d u c e d i n t h e L a r e a model t o show t h a t TDL d e p e n d s on YD

T h i s g i v e s a s i g n i f i c a n t l i n k a g e a c r o s s models.

To c o m p l e t e t h e w a g e - r a t e / l a b o r s e c t o r o f t h e L a r e a model, we i n t r o d u c e d a wage e q u a t i o n t h a t d e p e n d s on p r o d u c t i v i t y , a s i n t h e D a r e a model, and a s i m p l e t r e n d f o r t h e p a r t i c i p a t i o n r a t e . There i s l i t t l e p o i n t , i n t h e d e v e l o p i n g w o r l d a r e a , i n c o n s i d e r i n g t h c d i s t i n c t i o n between l a b o r f o r c e and employment, a s t h e r e a r e no m e a n i n g f u l s t a t i s t i c s o f unemployment. I t i s a l s o n o t a s s e n s i b l e

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t o t h i n k o f l a b o r ' f o r c e p a r t i c i p a t i o n a s b e i n g r e s p o n s i v e t o r e a l wage changes; t h e r e f o r e , , t h e p a r t i c i p a t i o n r a t e i s a s i m s l e t r e n d r e l a t i o n , t h a t i s a p p a r e n t l y d r i f t i n g downwards a t a v e r y slow pace.

The Gibson E f f e c t s h o u l d p r e v a i l f o r t h e d e v e l o p i n g c o u n t r i e s i n much t h e same way t h a t i t i s p r e s e n t i n t h e d e v e l o p e d c o u n t r i e s , b u t t h e f a c t o r o f p r o p o r t i o n a l i t y i s much lower. I t i s a l s o n o t a s c o n s t a n t . FJe have s i m p l y used t h e v a l u e toward t h e end o f t h e sample

span a s a n e s t i m a t e o f t h e r a t i o between i and p .

A p a r t from t h e s p e c i a l b a l a n c e o f i m p o r t s and e x p o r t s w i t h t h e developed c o u n t r i e s t h r o u g h t h e p o l i c y t r a n s f e r v a r i a b l e TDL,

it i s assumed t h a t i m p o r t s e i t h e r from t h e C o r L a r e a s a r e p r o - p o r t i o n a l t o a r e a GDP.

Modeling o f t h e c e n t r a l l y p l a n n e d economies i s much less

developed t h a n f o r t h e o t h e r two a r e a s . I n p a r t i c u l a r , t h e p r o c e s s o f f a c t o r s u b s t i t u t i o n between l a b o r and c a p i t a l a s a f u n c t i o n of r e l a t i v e r e a l r e w a r d s c a n n o t b e implemented. I n t h e f i r s t p l a c e ,

t h e r e a r e no a v a i l a b l e d a t a f o r t h e a r e a a s a whole on c a p i t a l c h a r g e s . There a r e some d a t a on wage r a t e and p r i c e l e v e l , b u t t h e r e s u l t i n g e s t i m a t e s of r e a l wage t r e n d s a r e s u s p e c t . I t a p p e a r s t h a t r e a l wages grow v e r y s l o w l y , c e r t a i n l y n o t a s f a s t a s p r o d u c t i v i t y .

The same r e a l income g e n e r a t i n g p r o c e s s i s u s e d , b u t t h e e q u a t i o n s f o r d e t e r m i n a t i o n o f t h e f u n d a m e n t a l c o e f f i c i e n t s s and k a r e d i f f e r e n t . The s c o e f f i c i e n t i s made a f u n c t i o n of t h e growth o f p e r c a p i t a r e a l income. T h i s i s s e n s i b l e and s t r a i g h t f o r w a r d enough. The s a v i n g s r a t e h a s r i s e n markedly i n t h e C a r e a . The c a p i t a l - o u t p u t

r a t i o i s a technological variab1.e and s h o u l d b e g i v e n p r i o r i t y f o r e x p a n s i o ! l a t t h e p r e s e n t s t a g e of dcvelopnwnt by t h e c e n t r a l p l a n - n i n ~ o f f i c i a l s . I t i s growing and s h o u l d c o n t i n u e t o grow, by p l a n . E u t t h e r e i s a d e l i b e r a t e e f f o r t t o i m p o r t h i g h t e c h n o l o g y goods

from t h e D a r e a . T h e e x p o r t s from D t o C a r e , t h e r e f o r e , i n t r o - duced, a s a r a t i o t o Y , i n t h e e x p l a n a t i o n o f k . T h e r e a r e few t i m e p o i n t s f o r t h e u s e o f t h i s v a r i a b l e , a s t h e p o l i c y o f o p e n i n g Up f o r c z p i t a l i m p o r t s h a s j u s t begun.

R a t h e r t h a n i n t r o d u c e i n t e r a c t i n g r e a l a t i o n s h i p s between r e a l wage and employment, we have s i m p l y u s e d t r e n d r e l a t i o n s f o r w/p and L/N. A s i n t h e d e v e l o p i n g a r e a model, no d i s t i n c t i o n i s made between l a b o r f o r c e and employment. I n t h e c a s e o f t h e

c e n t r a l l y p l a n n e d economies, it i s assumed t h a t t h e r e i s an e f f e c t i v e commitment t o f u l l employment.

B y and l a r g e , c e n t r a l l y p l a n n e d economies have s o u g h t t o maintain b a l a n c e d t r a d e , b o t h o v e r a l l a n d b i l a t e r a l l y . We have

imposed s t r i c t b i l a t e r a l b a l a n c e w i t h t h e d e v e l o p i n g w o r l d b u t a l l o w e d f o r a r e a l r e s o u r c e t r a n s f e r from t h e d e v e l o p e d t o t h e c e n t r a 1 l . y p l a n n e d w o r l d . T h i s t r a n s f e r i s t h e c o u n t e r p a r t of c r e d i t s t h a t have been g r a n t e d from o f f i c i a l and b a n k i n g s o u r c e s t o t h e c e n t r a l l y p l a n n e d economies t o p e r m i t them t o f i n a n c e h i g h t e c h i ~ o l o g y i m p o r t s and a d j u s t m e n t t o s h o r t r u n h a r v e s t d i s t u r b a n c e s . The v a r i a b l e CRDC i s a n o t h e r t r a d e p o l i c y v a r i a b l e t h a t h a s a n

e f f e c t c n XDC, w h i c h , i n t u r n , i n f l u e n c e s t h e c a p i t a l - o u t p u t r a t i o . The C a r e a model i s c l o s e d by making i n t e r n a l t r a d e , XCC, p r o p o r t i o n a l

t o GDP.

-

^{2 1}

-

The t r a d e v a r i a b l e s i n a l l t h r e e models a r e m e r c h a n d i s e f l o w s . T h i s g i v e s ' r i s e t o a n . a n a c c o u n t i n g i s s u e i n t h e b a s i c GDP i d e n t i t y :

GDP = C

+

I

+

(X-M)

C = r e a l consumer e x p e n d i t u r e s I = r e a l i n v e s t m e n t e x p e n d i t u r e s X = r e a l e x p o r t s

M = r e a l i m p o r t s

>I-M = r e a l t r a d e b a l a n c e .

T h i s b a l a n c e i n c l u d e s goods and s e r v i c e s . Savings a r e d e f i n e d a s G D P t h a t i s n o t consumed.

S = GDP-C;

t h e r e f o r e exogenous movements i n X-M c o u l d b e d r i v i n g f o r c e s of GDP i n t h e u s u a l s e n s e o f e x p o r t / i n i p r t m u l t i p l i e r s . T h a t e f f e c t d o e s n o t show up i n o u r models b e c a u s e w e h a v e i m p l i c i t l y l e t n e t s e r v i c e e x p o r t s o r i m p o r t s s e r v e a s a r e s i d u a l b u f f e r . The t r a d e i n f l u e n c e s work i n d i r e c t l y i n t h e s y s t e m t h r o u g h t h e i r e f f e c t s on s and k(K). I n e a c h o f t h e a r e a m o d e l s , t h e s e e f f e c t s h a v e b e e n s p e l l e d o u t t h r o u g h ED, EL, r D , T ~ T D L t X D C t , and CRDC. E s t i m a t i o n o f a w o r l d t r a d e m a t r i x o f i n v i s i b l e s and f u l l e r i n t e g r a t i o n o f t h e GDP a c c o u n t s t r u c t u r e i s one way o f p r o c e e d i n g t o h a n d l e t h i s i s s u e .

A TRIAL SIMULATION

A b a s e l i n e s i m u l a t i o n t o t h e y e a r 2 0 0 0 h a s b e e n w o r k e d o u t t o e x a m i n e t h e m o d e l ' s p r o p e r t i e s a n d p o s s i b l y t o g a i n some i n s i g h t a b o u t s u b s t a n t i v e r e s u l t s . I n o r d e r t o s i m u l a t e . t h e m o d e l f r o m 1 9 7 3 t o 2 0 0 0 , i t i s n e c e s s a r y t o s u p p l y i n p u t s i n t h e f o r m o f j . n i t i a l c o n d i t i o n s , e x o g e n o u s ( p o l i c y ) v a r i a b l e s , a n d s e l e c t e d e q u a t i o n a d j u s t m e n t s . T h e s y s t e m s t a r t s ^. on a c o r r e c t p a t h , a s f r o m

A s s u m p t i o n s a r e l i s t e d i n T a b l e I . R e s u l t s o f t h e s o l u t i o n a r e i n T a b l e 11.

T a b l e I

T~ 1 . 0 1 4 2 1 . 2 0 0 ( s t e p s o f 0.02 p e r y e a r t o max. 1 . 4 ) 1 . 4

'I L , 9 3 6 . 6 4 6 ( s t e p s o f . 0 2 p e r y e a r t o max. . 7 4 6 ) . 7 4 6

a 0 . 0 0 2 5 . 0 0 5 ( s t e p s o f 0 0 5 p e r y r . t o . 0 2 max. . 0 2 )

1 9 7 3 1 9 7 4 75-83 _-8 4 - - 2 0 0 0 _-

C R n ~

^{4 . 0 1 . 0} ( s t e p s o f 1 . 0 p e r y r . t o max. 1 0 . 0 ) 1 0 . 0

A d j u s t kc 0 . 3 0 . 1 p e r y r . t o 1 . 3 - 0 . 1 p e r y r . t o 0 . 0

max. 1 . 4 m i n . 0 . 0

SIfluAT i11.E JAS Ot'ErlED HIIH FDLI.oWING PARAMETERS IJED FlEX NK5 JL IV IF In TYPE OF DATA 34 5 n 1 73 1 1 ACTUAL HAY Sd Null TY LABFL LAG HSET t4lJbl Tv LADEL LAG KSET NUY TY LABEL 1 E 11-C~PS~R 1 1 9 E D-I/P 0 14 17E L-K/O 2 E D-K67.1 9 2 10E XDn 0 15 18 E L-S/GDP 3 F. D-K/O n a 1 XLD B 16 19E L-W/P 4 L LI-S/GIIP 9 5 12~ XCD 0 17 20 E L-EHPL 5 E I)-il/p 4 13F, XD 0 18 21 x L-POP b F: LI-Eilr'l. 3 11 14X TIME 0 19 22E L-E 7 X I)-p~?p 12 15 E L-GDPS7B 1 21 23 I! I.-I/P 8 E i)-E 13 16 E L-KS~B 1 22 24 E XDi. REGHESS1O:I cQFFF ICIENTd 1 Om b%;nfr 2 2.8h975~j 3 8.R51862 4 -8,899846 e I neonwon 10 i.0142eo 11 a.0~~00~ 15 e.qnnnn.j 16 fl.9356na 17 0,025000 18 1,eeeeee 22 1.7109fi2 23 Q.t?alu87 24 0.171637 25 0.094876 29 fle4h77PI 38 9.813109 31 Eia936088 32 0,008000 36 ri?,@Ot~~nO 37 R.O0BO00 58 0,750000 39 1,00880B 43 neY778h5 44 U.OIl052 45 0,866837 46 BaB97927 50 O.Ohfld@il 91H LIS FlGR ERR NCQL W!3 NS n in1 r3 n :s npl0 KSET NUH TY 4 25 E 25 26E' 28 27 E 31 28E 32 29 X 33 38 L 34 31 E 35 32 E '

LABEL LAG KSET NUH TY LABEL XCL 0 36 33 E C-W/P XLL 0 57 34 E C-EHPL XL 0 58 9 X C-POP TDL 1 39 36 L XDC t IHt 0 i9 37t XLC CwGDP878 1 41 38 E XCC bK/O C*8/ODP 0 8 44 45 19 E XC

LAG K8ET 8 48 0 31 1 SZ e 93 0 94 B 55 0 56 DYNAMIC S1'1111 AT 1Ot.1

~ m u u m m m ~ ~ u m a ~ ~ ~ w a m ~ c m a m ~ ) m ~ m e u D m h B O h d W d h @ m ~ ~ * Q ~ d = m O h O O 8 ( Y - ~ ~

O W X ~ ~ ~ U W O ~ ~ O ~ ~ O Q ~ * Q Q O U ~ ~ ~ ~ U ~ C , ~ ~

CI1 u r r r r r r r r r r r . r r a r r r c o * r r - r r r * * r r

D w ~ m a e a ~ ~ r n a ~ m ~ ~ m e m ~ r u a ~ ~ ~ ) a r n m m a m

~ ~ ~ ~ ~ ~ m ~ m n m u u u m m m a ~ ~ ~ ~ ~ ~ ~ e m s ~ ~

- - d - r d d 4 ~ d d a d d e e d d d d * w d d m I l t U Q I

u . c m a 2 O * r - - + S + w C G C 7 Q N + h ' S S h ~ . K C , Y L n

~ . ~ + ~ ~ O ~ H W T ~ ~ S ~ ~ C ~ ~ C W C Q . C I Q ~ L T V +

C'd E W ~ ~ P ( O H S ~ + J C J # W ~ B ~ S ~ ~ \ ~ M ~ W P W C ~ C m U . . .

U m - e - v , m a 3 ~ r n C - e x + E = r Z m y c P I C L T r \ r w C C ~ r r l

x r u t u r u ~ ~ w m a . = r ~ ~ ; : m r n ~ u . ~ r - r - a s : u s . . - n t m

..-.----

C ~ ~ P - C S Q - L - 4 - a F Z ! m V T - J L T - L T L T 5 1 ' J . 9 + m - r - ~ - . ~ u v L - n ~ a - - ~ ~ r - - - v z - v ~ m * r t = - u

-

r - ~3 - ~ U = T U T ; ~ O~ c i z m ~ r ~ ~ ~ - + r \ : ~ e v = . r - ~ C M C . . . . . . . . . . . . . . . . . . . . . . . . . . . .

- V I L T ; * C . & ~ C z F Q S - N ~ C W K ; ~ L T ~ ~ C Z I P ~ H W ~ ~ F L -

X - c c - - - r - + r ~ r \ l f b h n ~

-

T h i s i s , i n f a c t a b a s e l i n e s c e n a r i o ; t h e r e f o r e , t h e .---

s c r i p t wri:Lersl c h o i c e s f o r i n p u t s n e e d e x p l a n a t i o n . T h e e s t i m a t e o f ^T~ arid ^T L f o r 1 9 7 3 / 7 1 a r e f r o m o b s e r v e d d a t a , a s w e l l a s t h e s e c a n h e e s t i m a t e d . T h e y r e f l e c t t h e l a r g e i n c r e a s e i n o i l p r i c e s i n 1 9 7 1 , f o l l o w i n g a g e n e r a l r i s e i n b a s i c c o m m o d i t y p r i c e s , a g a i n s t t h e d e v e l o p e d c o u n t r i e s , i n 1 9 7 3 . T h e 1 9 7 3 r i s e s w e r e o n a m o d e s t s c a l e . A f t e r 1 9 7 4 , t h e r e h a v e b e e n some f u r t h e r i n c r e a s e s i n o i l p r i c e s , b u t n o t e n o u g h t o p r o t e c t OPEC ( a n d d e v e l o p i n g c o u n t r i e s , a s a w h o l e ) a g a i n s t d o l l a r d e p r e ~ i a t i o n ~ w i t h i n f l a t i o n i n t h e D a r e a . W c , t h e r e f o r e , b r i n g u p

+

g r a d u a l l y a f t e r 1 9 7 4 t o show t h a t

L

t h e d e v e l o p i n g c o u n t r i e s h a v e n o t h e l d t o t h e i r maximum g a i n s o n t e r m s of t r a d e . T h e r e l a t i v e p r i c e s ~ ~ a n d .rL s h o u l d n o t b e p u r e r e c i p r o c ~ l s o f ~ a c h o t h e r b e c a u s e t h i s i s a 3 - a r e a w o r l d , b u t t h e v s h o u l d I ~ e h r a p p r o x i m a t e r e s e m b l a n c e t o a r e c i p r o c a l r e l a t i o n s h i p ; t h e r e f o r e , ^T~ i s moved u p t o b e c l o s e r t o

T h e s h a r e of d e v e l o p e d c o u n t r i e s '

GDP

t r a n s f e r r e d t o d e v e l o p i n ? c o u n t r i e s h a v e r a r e l y s a t i s f i e d t h e l a t t e r ' s t a r g e t s . I n 1 9 7 3 , t h e b i l a t e r a l a c c o u n t s w e r e i n n e a r b a l a n c e ; t h e r e f o r e , w e g r a d u a l l y i n c r e a s e d a i d t o a t a r g e t o f 2 . 0 % . I n 1 9 7 7 - 7 8 , it f a l l s w e l l b e l o w 2 % , b u t t h a t l e v e l i s a maximum t h a t OPEC p r i c i n g p l u s N o r t h - S o u t h d i a l o g u e s e e m c a p a b l e o f e x t r a c t i n g . T h a t g o v e r n s o u r c h o i c e o f 2 . 0 a s a n u p p e r l i m i t .

I n 1 9 7 3 , t h e S o v i e t g r a i n f a i l u r e ( o f 1 9 7 2 ) l e d t o a l a r g e c r e d i t i n t r a d e w i t h t h e D a r e a . T h i s was c u t b a c k t o a m o r e normal l e v e l o f 1 . 0 b i l l i o n ( 1 9 7 0 d o l l a r s ) a n d t h e n i n c r e a s e d . i n a g r a d u a l t r e n d t o a m a x i n ~ u i ~ ~ o f $10 b i l l i o n .

Two e q u a t i o n s a p p e a r e d t o n e e d a d j u s t m e n t i n o r d e r t o s e t t h e s o l u t i o n o f f i n t h e r i g h t n e i g h t o r h o o d . T h e r e a l wage r a t e i n d e v e l o p i n g c o u n t r i e s was e s t i m a t e d f r o m a l o o s e - f i t t i n g c q u a t i o r l a n d s t a r t e d f r o m a l o w v a l u e t h a t d i d n o t p i c k u p t h e jump i n w a g e s a s OPEC f u n d s f l o w e d i n t o t h e L a r e a . W e , t h e r e f o r e , a d d e d 0 . 2 t o t h e i n d e x v s l u e o f w/p. The s c e n a r i o r e s u l t s f o r kc showed a s t e a d y d e c l i n e o f t h e c a p i t a l - o u t p u t r a t i o . T h i s i s c o n t r a r y t o c e n t r a l p l a n n e r s ' t a r g e t s . W e a d j u s t e d t h e e q u a t i o n u p w a r d s t o reacl-1 a maximurr~ o f 5 . 0 b y 1 9 8 5 , a s s u m i n g - t h a t d i r e c t p l - a n n i n g c o u l d a c h i e v e t h a t a d d - o n . T h i s k e e p s t h e c e n t r a l l y p l a n n e d economies o n a p l a u s i b l e g r o w t h p a t h w i t h c a p i - t a l e x p a n s i o n .

The e s t i m a t e d e x p a n s i o n r a t e f o r t h e D a r e a ' s GDP i s 4 . 5 % . T h i s c o m p a r e s w i t h a n e s t i m a t e o f 4 . 6 % i n t h e w h o l e p e r i o d 1 9 5 3 - 7 4 . S t a r t i n g f r o m 1 3 6 0 , e l i m i n a t i n g t h e p e r i o d o f r e c o n s t ~ : u c t i ~ ~ i n J a p a n and W e s t e r n E u r o p e , t h e r a t e t o 1 9 7 4 was 4 . 8 % ; t h e r e f o r e , a

s i g n i f i c a n t slowdown i s p r o j e c t e d a s c o m p a r e d w i t h t h e p e r i o d o f f a s t g r o w t h , h u t t h e r a t e i s p r o j e c t e d t o r e t u r n t o a l o n g e r r u n n o r m a l r a t e

-

n o t n e c e s s a r i l y a r e d u c e d r a t e .

Much i n t e r e s t a t t a c h e s t o t h e g r o w t h r a t e e s t i m a t e b e c a u s e i t i s q e n e r a l l y f e l t t h a t e x p e n s i v e e ' n e r g y , l i m i t s o f e x h a u s t i b l e r e s o u r c e s , a n d e n v i r o n m e n t a l p r o b l e m s may l e a d t o a s l o w g r o w t h p a t t e r n f o r OECD c o u n t r i e s , much b e l o w h i s t o r i c a l a v e r a g e s . T h i s model s i m u l a t i o n d o e s n o t come n e a r a r a t e a s l o w a s 4 . 0 % f o r t h e r e s t o f t h e c e n t u r y ; i t d o e s i n d i c a t e a slower r a t e f o r t h e p o s t - embargo d e c a d e , 1 9 7 3 - 8 3 , a t 4 . 3 % , p i c k i n g u p s l i g h t l y i n t h e n e x t d e c a d e .